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Master Document
Activity Code 17600 DFAS Financial Capability Audit
Version 7.0, dated May 2011
B-1 Planning Considerations
Purpose and Scope
The purpose of the financial capability audit for DFAS Installment Agreements is to determine
whether the contractor is capable of repaying the proposed installment amounts. The audit will
not be stopped with a financial condition risk assessment, regardless of the results of the risk
assessment. These audits are performed at the request of the DCMA Financial Capability
Group (FCG) on behalf of Defense Finance and Accounting Services (DFAS). In accordance
with DoD Financial Management Regulation, Volume 10, Chapter 18, when a debtor to the
U.S. Government can establish sufficient justification, a series of installment payments may be
approved by DFAS, which will ensure liquidation of debt within a reasonable time frame.
Debts generally occur when the contractor has received an overpayment from DFAS. Contract
overpayments can occur because of payment mistakes (e.g., duplicate payments) or because of
contract administration adjustments. When contractors anticipate having financial difficulty
repaying the debt, the contractor may approach DFAS for a repayment installment plan. Prior
to approving the installment agreement, DFAS may request the contracting officer to perform a
financial capability audit taking into consideration the proposed installment payments to
ensure that the contractor has the financial capability to repay the installments. The
contracting officer may request assistance from DCAA as discussed in CAM 14-302. In
addition to determining the contractor’s ability to repay the debt, the audit will also determine
what the contractor did with the overpayment and why it is currently not available to return it
to the Government.
References
1. FAR 9.104-1, General Standards
2. DFARS 232.072, Financial Responsibility of Contractors
3. SAS 59, The Entity's Ability to Continue as a Going Concern
4. CAM 14-300, Assessing A Contractor’s Financial Capability
5. FASB 95, Statement of Cash Flows
B-1 Preliminary Steps
Version 7.0, dated May 2011 WP Reference
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1. Research and Planning
a. Financial capability audits are generally performed at the parent
company. If this is a request for audit of a contractor segment,
ensure that an exception for performing the audit at the segment
level applies (CAM 14-302). Coordinate with the requestor.
b. Review the audit request for matters of particular interest to
acquisition officials and prepare an acknowledgment letter.
Document the specific factors and risk that justified the request for
audit as discussed with the contracting officer. Determine if a
recent risk assessment or audit has been performed. This may
reduce some of the audit steps needed, but will not replace the
requirement to perform a full financial capability audit.
c. If the detailed risk assessment/audit is being performed at the
parent company (as determined in Step 1a above):
(1) Auditors at the parent location should identify all Government
subsidiaries with significant Government contracts and
cognizant DCAA offices.
(2) If the parent “sweeps cash” through a cash management plan,
request a copy of that plan to include any policies and
procedures related to how transfers of cash surpluses or
coverage of subsidiary cash deficits are accounted for (i.e.,
inter/intra accounts receivables established and related
liabilities, bank accounts used, identified transactions between
the parent and the Government subsidiary(ies)) detailing the net
cash transferred to the parent or the net cash transferred to the
subsidiary(ies) over the past three years.
d. Review permanent files.
(1) Review the results of prior accounting system surveys and
results of related audits.
(2) Obtain financial statements for the last three years. The audit
request should include the contractor’s financial statements for
the past three years and the 12-month cash flow forecast
reflecting the proposed installment amounts.
(3) Review the most recent financial condition information
obtained from the contracting officer.
(4) Review any audit leads, including the results of any
internal/external audit work in this area, and any audit leads of
financial problems. Auditors at parent offices with multiple
subsidiaries should survey auditors at all Government locations
to identify any unfavorable or adverse events, if deemed
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necessary.
(5) Obtain the mix of Government and commercial business.
(6) Document a sufficient understanding of internal controls that is
material to reporting the contractor’s financial capability in
order to plan the audit and design procedures to achieve the
audit objectives.
e. If the evidence to be obtained during the audit is dependent on
computerized information systems, document on W/P B-2 the audit
work performed that supports reliance on the computer-based
evidence. Specifically, document or reference one or more of the
following in W/P B-2:
(1) the audit assignment(s) where the reliability of the data was
sufficiently established in other DCAA audits,
(2) the procedures/tests that will be performed in this audit to
evaluate the incurred costs that will also support reliance on the
evidential matter, and/or
(3) the tests that will be performed in this audit that will be
specifically designed to test the reliability of the
computer-based data.
(4) If reliance cannot be placed on the computer-based information
processed through the contractor’s computerized system, the
auditor should assess control risk at maximum and qualify the
audit report accordingly.
f. In planning and performing the examination, review the fraud risk
indicators specific to the audit. The principal sources for the
applicable fraud risk indicators are:
Listing of Fraud Indicators, Financial Capability Audits (See
APPS Other Audit Guidance (OAG) folder for FINCAP-Listing
of Fraud Indicators.doc)
Document in W/P B any identified fraud risk indicators and your
response/actions to the identified risks (either individually, or in
combination). This should be done at the planning stage of the
audit as well as during the audit if risk indicators are disclosed. If
no risk indicators are identified, document this in W/P B.
g. If the company is not publicly held, request the contractor to
provide written confirmation that the financial statements provided
during the financial condition risk assessment disclose all off-
balance sheet arrangements and related party transactions. A
proforma letter requesting contractor confirmation on the financial
statements is included in the Administrative section of the APPS
entitled 31 - Confirmation Letter - Financial Statements.
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h. If the company is not publicly held, and the contractor states that all
off-balance sheet arrangements and related party transactions are
not reflected in the financial statements and/or cash flow forecast,
request the contractor provide a schedule separately showing (1)
the maximum liability included in the financial statements and cash
flow forecast and (2) the maximum liability not reflected in the
financial statements and cash flow forecast for off-balance sheet
arrangements and related party transactions.
i. Publicly held companies are required to disclose details regarding
off-balance sheet arrangements under a separately captioned
subsection of the “Management’s Discussion and Analysis” section
of the quarterly and annual U.S. Securities and Exchange
Commission (SEC) filings. Review the appropriate section of the
SEC filings.
j. The contractor should be requested to provide:
(1) Any inquiries from their independent public accounting (IPA)
firm related to off-balance sheet arrangements and related party
transactions and their responses.
(2) The results and reports of any internal audits, reviews or other
analyses of off-balance sheet arrangements and related party
transactions.
k. Prepare a list of data required for the audit and provide to the
contractor when establishing the entrance conference date.
Conduct an entrance conference with the contractor in accordance
with CAM 4-302. Key company executives should be invited to
attend the conference.
l. During the entrance conference, ask the contractor if there are any
significant events that have occurred or may occur in the near
future (sale of a division, loss of a contract, large layoff, new
contract, buying larger plant, etc.).
m. Document any significant or unfavorable events that would impact
the contractor’s financial status (loss of a contract, major layoff,
sale of a division, etc.). The existence of this type of information
may be contained within the permanent files, audit lead sheets,
business system audits, local newspaper articles, or obtained
through discussions with the contractor, supervisor, or auditor that
normally works at the contractor location.
2. Risk Assessment
a. Obtain preliminary data and information.
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(1) Review the previous risk assessment.
(2) Based on the circumstances, tailor the following audit to
perform the assessment.
(a) Gather the information needed to perform or update the risk
assessment. If not already in the permanent files obtain:
(i) annual financial statements and/or annual reports for the
last three years, plus year-to-date financial information
for the current year. The contractor’s financial
statements for the past three years should be provided
by DFAS in its request for audit;
[Note: Caution should be used when using current year
data representing a period of less than six months. It
may not be representative to use as a basis to assess the
contractor’s current financial condition. Additional
analysis should be performed when less than six months
of current year data is obtained.]
(ii) current Form 10K and 10Q (required SEC annual and
quarterly filings for publicly traded companies);
(iii)tax returns for non-publicly traded companies to
validate unaudited financial statements; and
(iv) external credit ratings.
(b) Request the contractor to provide any analyses it has
performed to assess its current and future financial
condition. Ask the contractor to provide details on prior,
current, and forecasted events that have had or are
forecasted to have a favorable or unfavorable impact on its
financial condition.
b. Internal Controls.
The auditor should consider the contractor's internal control
structure relating to financial planning and monitoring and its cash
management plan. Review applicable business system audits (or
the ICQ for non-majors) to determine if any internal control
deficiencies have been identified that impact this audit. Some of
the key controls are:
(1) written policies and procedures that require evaluation of
current financial conditions in order to anticipate and avoid
unfavorable or adverse conditions;
(2) periodic assessments of accounts payable and receivable,
including analysis of accounts payable aging and the
collectability of accounts receivable;
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(3) periodic assessments to ensure compliance with any loan
covenants and debt payment schedules;
(4) preparation of cash flow forecasts, including reasonable and
supported assumptions;
(5) monitoring, analyzing and managing its cash flow; and
(6) periodic assessments of contract cost performance.
c. Trend Analysis of Key Financial Ratios.
(1) Use the contractor's financial statements obtained in step
2.a.(2)(a)(i) above to compute the ratios for the most recently
completed fiscal year and the previous two fiscal years. An
electronic workbook that calculates financial ratios is included
in the OAG section of the APPS entitled Financial Capability
Workbook. If compelling reasons exist to question the financial
statements, or the statements are unaudited, then the auditor
should perform additional steps to verify the financial
information prior to computing the ratios (e.g., compare key
financial statement amounts (total assets, total liabilities, etc.) to
the general ledger or tax returns to validate data in the
unaudited financial statements). The audit report should be
qualified if the financial statements are unaudited.
(2) Request from the contractor any additional ratios that the
contractor believes may be a better indicator of its financial
condition. Consider using such ratios.
(3) Review the trends of the contractor's key ratios. If consistent
unfavorable or adverse trends are noted for the most recent
three year period, obtain from the contractor an explanation for
the unfavorable or adverse trends and any actions being taken to
improve the conditions. Sometimes a change in accounting
practice or an unusual accounting method, such as an inventory
valuation method, will explain the variance.
d. Trend Analysis of Key Financial Statement Elements
(1) Review the trends of the following financial statement elements
for the most recently completed fiscal year and the previous two
fiscal years. If consistent unfavorable or adverse trends are
noted, obtain and verify any explanation from the contractor
and any actions being taken to improve the conditions.
Profit/Loss
Sales
Cash Flow from:
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o Operating activities
o Investing activities
o Financing activities
Working Capital
Net Worth
Long-term Liabilities
(2) The notes to the financial statements and/or the SEC filings
(10K and 10Q) should be reviewed for any conditions or
statements that may indicate financial risk requiring further
inquiry/review. Determine if there is a going concern comment
in the most recent financial statements. If so, this is a high risk
indicator that requires further analysis.
e. Off-Balance Sheet Arrangements and Related Party Transactions
The auditor should review the information provided by the
contractor, as well as information contained in the quarterly and
annual SEC filings (if a publicly traded company) to determine if
the financial statements disclose the maximum liability of off-
balance sheet arrangements and related party transactions. A list of
indicators that identifies the existence of related parties, entitled
Potential Related Party Indicators, is included in the OAG section
of the APPS and should be used to assist in identifying situations
that would indicate related party arrangements.
(1) Review for audit leads any inquiries from the contractor’s IPA
related to off-balance sheet arrangements and related party
transactions and the contractor’s response to these inquiries.
(2) Compare for consistency the contractor’s response to IPA
inquiries concerning off-balance sheet arrangements and related
party transactions to the contractor’s disclosures in the
confirmation letter. Follow-up any inconsistencies with the
contractor.
(3) Review for any audit leads the results and reports of any
internal audits, reviews, or other analyses of off-balance sheet
arrangements and related party transactions.
(4) Verify that the contractor-prepared schedule (for nonpublicly
held companies) identifying the maximum possible liability for
each disclosure of off-balance sheet arrangements and related
party transactions is based on sufficient, competent, evidential
matter, which should be reconciled to the contractor’s
supporting documentation for each liability.
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f. Timely Payment of Payroll Taxes.
Determine if the contractor is paying its payroll taxes on a timely
basis (CAM 14-304h). [Note: Contractor delays or the nonpayment
of payroll taxes may affect the allowability of claimed and billed
costs and should be promptly discussed with the Supervisory
Auditor.]
g. Analysis of Parent Company’s Management of Subsidiary’s Cash.
(1) Review and assess the parent’s administration of its cash
management plan. This includes reviewing the contractor’s
processes, controls, procedures and management reporting
mechanisms used for ensuring that the cash needs of any
subsidiary with Government contracts are being met. In
situations where the parent has not guaranteed the performance
of the subsidiaries, perform additional analysis of the
corporation’s cash management plan and assess the following:
(a) whether a subsidiary with Government contracts is a
consistent generator or user of cash to/from the parent;
(b) how often subsidiary needs cash from the parent;
(c) the significance of the funds being used by the subsidiary;
(d) how such funds are being accounted for, e.g., liabilities,
reduction of equity; and
(e) parent actions taken or planned (based on its cash
management plan) to support the financial needs of the
subsidiary that is consistently using cash from the parent.
(2) If analysis of the cash management plan and/or data discloses
financial distress at a subsidiary with Government contracts,
(and the contractor has not guaranteed or taken other actions to
financially support the subsidiary’s performance) determine
whether assistance from the subsidiary is considered necessary.
Consider requesting from the subsidiary auditors data which
may not be available at the parent location, e.g., accounts
payable aging, identification of loss contracts, local ACO
inquiries, knowledge of other financial distress indicators.
h. Analysis of Parent Data by Subsidiary Auditors.
These risk assessment steps should be performed when the risk
assessment/audit is being performed at a subsidiary.
(1) If the parent is a public company, the auditor should use the
financial data under Filings & Forms (EDGAR) presented on
the SEC website (www.sec.gov). The auditor will rely upon
this published contractor financial data to determine if there are
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indicators of financial distress at the parent location.
(a) Note the type of audit opinion being rendered on the
financial statements by the IPA;
(b) other comments/notes contained in the published financial
statements; and
(c) any going concern comment (SAS 59) made by the IPA.
(2) If the parent is a nonpublic company, the auditor should
normally not pursue access to the financial records of the parent
company unless (1) total Government dollars at the subsidiary
location(s) are significant, (2) the parent sweeps cash or
guarantees the subsidiary’s performance, and (3) the auditor has
indicators of potential financial distress of the parent. Unless
all three of these key elements exist, auditors will only perform
a risk assessment and/or audit at the subsidiary location.
i. Other Indicators.
(1) Low bond/debt ratings or declining trends may signal problems
for the company in obtaining cash outside of normal operations.
Where a conflict exists between external bond/debt ratings
(especially high bond/debt ratings) and other risk assessments,
the auditor should ascertain and evaluate the reason for the
conflict. Bond/debt ratings may not be indicative of a
company's ability to perform on contracts, and may not
consider all information available to the auditor.
(2) Discuss any plans the contractor may have to enter into
significant leases, make significant capital expenditures,
liquidate assets, borrow significant cash or restructure existing
debt, reduce or delay expenditures, and increase ownership
equity. Verify accuracy of decisions to supporting data.
(3) Identify and analyze any unusual compensation packages used
to retain employees or outstanding loans to other company
operations or company officers that would drain financial
resources from an operating unit with Government contracts.
(4) Be alert to any other potential considerations that may warrant
more analysis in the risk assessment or expansion to any audit.
These items may be identified by the customer, company
employees, other auditor or other sources. These may include:
Borrowing from or under-funding pension plans,
Non-payment of insurance premiums or under-insurance, or
Poorly maintained infrastructure (i.e., facilities, accounting
software, etc.).
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j. Summarize the results of the detailed risk assessment. Proceed to
the detailed audit steps in this audit program beginning with Cash
Flow Forecasts (section C-1).
C-1 Cash Flow Forecasts
Version 7.0, dated May 2011 W/P Reference
1. Obtain Data and Other Information
This section of the audit program focuses on financial capability and
includes an evaluation of the forecasted cash flows and related
information. Obtain the following information from the contractor to
proceed with the audit:
a. A cash flow forecast with supporting rationale covering at a
minimum a one year period. The cash flow forecast reflecting the
proposed installment amounts should be provided by DFAS in its
request for audit. [Note: the FAO’s audit opinion must reflect a
cash flow forecast of no less than six months from the date of the
audit report.]
b. The current fiscal year operating budget, including each contractor
division.
c. The capital acquisitions budget for the next three years.
d. Accounts payable aging schedules for more than one period.
e. Accounts receivable aging schedules for more than one period.
f. Copies of any loan covenants/agreements.
g. Status of any outstanding lines of credit.
h. Debt/Bond payment schedules.
i. Pending/potential claims and the status of any legal proceedings,
investigations or any potential recoveries of losses.
j. Current Board of Directors Minutes.
k. Current sales backlog and new contract awards.
l. Corporate guarantees, if applicable.
m. Subordination agreement, if applicable.
n. Any updates to status of any unfavorable or adverse conditions
noted during the risk assessment.
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o. Written Confirmation Letter and Other Information.
Request the contractor to provide written confirmation that the
cash flow forecast provided during the financial capability audit
includes liabilities associated with off-balance sheet arrangements
and related party transactions. A proforma letter requesting
contractor confirmation on the cash flow forecast is included in the
Administrative section of the APPS entitled 31 - Confirmation
Letter – Cash Flow Forecast. In addition to the written
confirmation, the contractor should also be requested to provide:
(1) A schedule separately showing (i) the maximum liability
included in the financial statements and cash flow forecast and
(ii) the maximum liability not reflected in the financial
statements and cash flow forecast when the contractor states
that the maximum liability for off-balance sheet arrangements
and related party transactions is not reflected in the financial
statements and/or cash flow forecast.
(2) Any inquiries from their IPA related to off-balance sheet
arrangements and related party transactions, associated with
these statements, and their responses to these inquiries.
(3) The results and reports of any internal audits, reviews or other
analyses of off-balance sheet arrangements and related party
transactions related to these statements.
2. Review of Cash Flow Forecasts
The cash flow forecast should be evaluated by the auditor for
reasonableness and the contractor’s ability to make the installment
payments. The evaluation of the cash flow forecast will form the basic
framework for the auditor’s opinion on the contractor’s financial
capability. The auditor needs to have a reasonable basis to assure that
the contractor will have sufficient sources of cash to perform on
Government contracts and to make the installment payments.
a. Evaluate the contractor’s cash flow forecast.
(1) If the forecast is presented in the form of a statement of cash
flows, verify the key amounts to the forecasted income
statement and balance sheet. Verify that the cash flow forecast
reflects the proposed installment agreement amounts.
(2) Compare significant cash flow line items to actual historical
balances. Determine if sales or production forecasts and
related operating costs are consistent with recent financial
statement trends and evaluate supporting assumptions.
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(3) Verify that projected sales agree with the contractor's annual
financial plan and indirect rate forecasts. A list of projected
sales or sources of cash, by contract, should be reviewed by the
auditor and verified to contract data on a sample basis. Any
contracts in a loss position should be carefully reviewed to
determine the extent to which any additional billings might be
made. Assist audits may be required at organizations with
multiple divisions or subsidiaries.
(4) Other significant sources of cash should be identified by the
contractor and verified by the auditor. Any projected
collection of outstanding claims or unliquidated contract
balances should be verified with the appropriate agency. If a
significant projected source of cash is due to a planned
liquidation of accounts receivable, confirmations may be
required to the extent they were not audited by independent
auditors. Contact the ACO prior to confirming accounts
receivable balances outside the Government. If the ACO
requests that receivables not be confirmed, qualify the report
accordingly. Only the difference between the beginning and
ending balance represents a source of cash.
(5) Determine if the contractor's ability to achieve its cash flow
forecast is dependent on the favorable outcome of one or a few
key event(s). If so, the circumstances and chance of
occurrence should be reviewed.
(6) Verify projected uses of cash to the contractor's annual
financial plan and forecasted indirect rate submission. Review
the contractor's production schedule to determine if the
variable uses of cash, such as material purchases and payroll
(headcount), are adequate to support performance assumptions.
(7) Verify that all interest and principal payments on any debt,
loans, or lines of credit are considered in the forecast.
(8) Determine if the cash flow forecast considers any unfavorable
or adverse conditions that have already been identified in the
auditor’s review of existing financial conditions.
(9) Compare previous cash flow forecasts with actual statements
of cash flows to determine the reliability of past forecasts.
(10) Determine whether the contractor has the financial means to
meet ongoing costs of operations in the near term.
(a) Routine borrowings against a line of credit that do not
consume most of the line of credit are not a condition that
should be considered financial distress. However, a
projected shortfall in meeting short term obligations may
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require obtaining cash from outside the normal course of
operations by means of extraordinary management actions
(such as liquidation of assets, significant loans, or sale of
stock) which is considered financial distress.
(b) If a significant shortfall is not projected, but cash flows are
dependent on significant conditions or events for which
there is significant doubt (such as optimistic sales of a new
product, anticipated contract awards, or a negative cash
flow due to a pending contingent liability), the contractor
would also be considered to be in a condition of financial
distress.
(11) Using the contractor-prepared schedule identifying the
maximum possible liability for off-balance sheet arrangements
and related party transactions, inquire of the contractor if any
of the liabilities will become due in the near term (one year or
less). If any are, verify that these cash outflows are reflected in
the contractor’s cash flow forecast.
b. While examining the contractor’s financial statements and cash
flow forecast, if in the auditor’s judgment the contractor has other
financial means of making the total lump sum payment to DFAS,
these financial means should be disclosed in the report. This
would be valid only if the current financial condition is acceptable
and the lump sum payment can be made without changing the
financial condition to unfavorable.
D-1 Liquidation Of Accounts Payable
Version 7.0, dated May 2011 W/P Reference
The auditor should determine if the contractor is liquidating accounts
payable on a timely basis by reviewing the contractor's accounts payable
aging schedule. Obtain a copy of the contractor's policy regarding
liquidating accounts payable. For a multidivisional corporation with a
decentralized accounts payable function, the auditor may need to request
assist audits of segments/divisions with significant accounts payable
balances.
1. Verify the accounts payable aging schedule for more than one period
to supporting accounting records (e.g., general ledger). Contractors
may have the ability to manage accounts payable through various
computer sort programs. When account balances are significant and
the contractor does not prepare an aging schedule or similar analysis,
the contractor should be asked to perform such analysis. If the
contractor refuses, the auditor should report this absence of normal
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financial management and budgetary controls as a significant internal
control weakness. The auditor will then consider evaluating
liquidation of accounts payable by such audit procedures as statistical
sampling and use of the IT retrieval software (e.g., SAS and FOCUS).
2. Compare debt cancellation dates with cancelled checks on a sample
basis to determine if any checks are being held.
3. Evaluate the number of days outstanding. Any significant deviation
from the contractor's policy should be explained. Significant payables
over 90 days should also be explained by the contractor. Determine if
the reason for slow liquidation of payables is due to inadequate
available cash.
E-1 Loan Covenants
Version 7.0, dated May 2011 W/P Reference
Review the contractor's loan agreements and covenants to determine if the
contractor is complying with all of the conditions of the loan such as
maintaining established ratios.
1. Request the contractor to provide a historical analysis of the
established ratios. Verify calculations. If the ratios are not being
monitored by the contractor, the auditor should report this as a
material internal control weakness.
2. If the loan covenants or financial ratios are not being met, determine if
they have been waived by the financial institution.
3. Review the debt payments schedules. Verify that historical payments
have been made on a timely basis. Note future payment requirements
for verification during the contractor's cash flow forecast.
4. Verify that the contractor properly classifies any lines of credit as
short/long-term since the improper classification would affect the
calculation of some financial ratios.
5. Review the interest rate charged by the lending institution. An
increase in the rate charged significantly above the prime rate could be
attributable to perceived contractor financial distress.
6. Review loan/line of credit to determine if they are secured by
collateral. If the contractor receives progress payments, and collateral
includes inventory/work-in-process, determine if a subordination
agreement is necessary.
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F-1 Bankruptcy
Version 7.0, dated May 2011 W/P Reference
Determine if the contractor has filed a petition for reorganization with the
Bankruptcy Court or if any legal proceedings have been initiated by
vendors for payment. [This condition gives rise to significant uncertainty
as to the contractor's ability to adequately perform on Government
contracts.] If the contractor has filed for bankruptcy:
1. Determine if the ACO has been notified of any petition for
bankruptcy. If not, provide written notification to the ACO
immediately, and provide copies to the Regional Special Programs
Office and Headquarters, Attention PPD.
2. Determine what legal provisions exist and obtain the required financial
information to ascertain the company's continuing financial capability.
3. Determine if the installment payment amount is included in the
bankruptcy reorganization plan.
4. If the installment plan is not included in the bankruptcy reorganization
plan, determine the contractor’s ability to make the installment plan
payments.
5. Consider qualifying the audit report regarding the bankruptcy
proceedings.
G-1 Other Potential Conditions
Version 7.0, dated May 2011 W/P Reference
1. Determine what the contractor did with the overpayment and why it is
currently not available to return it to the Government.
2. Determine where the money owed to DFAS is recorded and when it
was recorded. Ensure that a portion of the debt is recorded as a long
term liability if the installment agreement is for greater than 12
months.
3. Other potential conditions that must be considered include:
Litigation
Unusual agreements with the Internal Revenue Service
Vendor requirements for Cash or Delivery payments
Production delays
Contract overruns
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Labor disputes, etc.
H-1 Financial Flexibility
Version 7.0, dated May 2011 W/P Reference
If the above steps do not disclose financial distress, completion of this
section is not required.
1. Determine if the contractor has any plans to minimize the effects of a
forecasted insufficient cash flow. Such extraordinary management
actions may involve any or all of the following:
Company reorganization/downsizing
Restructuring of debt
Liquidation of assets
Additional borrowings
Reduced or delayed expenditures
Increased ownership equity
Reduced dividends
Sale of a portion of the company
2. Review the following indicators in order to determine the extent of the
contractor's ability to obtain additional cash:
a. Net worth (Assets - Liabilities). Companies with no or little net
worth have a difficult time attracting additional investment. Lines
of credit or additional borrowings are often guaranteed by officers’
and/or shareholders’ personal assets.
b. Current Outside Ratings. Companies with high debt/bond/stock
ratings may be able to raise additional cash through the issuance of
additional debt, bonds, or stock. However, it should be noted that
such ratings are only for existing debt, bonds, and stock. The
company's ability to meet new interest, principal and/or dividends
must be evaluated.
c. Liquidation of Assets. In order to raise cash, a company may sell
existing assets. It is important to determine that such assets are not
secured and are not pertinent to the continued operations of the
company. Determine any direct or indirect effects of any planned
disposition on Government contracts. The sale of assets that are
secured often does not provide additional cash. However, it may
favorably impact the debt to equity ratio, the cash flow to debt
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ratio, and reduce debt service costs.
d. Bank Line of Credit/Loan Covenants. Covenants should be
reviewed to determine if the contractor is in compliance with the
terms of the agreement, including maintenance of established
minimum account balances and ratios. Determine if the credit line
is guaranteed by another individual or corporation. If operating
losses continue, such guarantees may be withdrawn, thereby
eliminating existing lines of credit. Also, determine the amount of
credit currently outstanding, amounts available, and terms of
repayment on current balances.
A-1 Concluding Steps
Version 7.0, dated May 2011 W/P Reference
1. Summarize the results.
Select and use an opinion paragraph verbatim from CAM 14-307a.
Following the opinion, it may be appropriate to include additional detail
that addresses the specific contractor situation. For example, there may
be improving or worsening conditions. There also may be mitigating
circumstances such as the lack of progress payments. Prepare and
submit a draft audit report for review, based upon the format in CAM
10-1200.
2. Obtain, as necessary, regional approval of draft report.
3. Report separately, in flash report format, any internal control deficiency
found during the audit.
4. After supervisory review, coordinate preliminary results with DFAS and
the ACO. If the issues warrant, invite the ACO to attend the exit
conference.
5. Hold an exit conference with contractor and provide a draft copy of the
audit results for contractor written comment. Significant issues should
have already been discussed with the contractor during the audit.
Allow a reasonable time for the contractor's written response. Top level
contractor management should be involved in the exit conference if
sensitive issues are going to be discussed or the draft report states there
is some doubt regarding the contractor's ability to perform on
Government contracts or to make its installment payments.
6. Prepare final report incorporating the contractor's response.
7. The report should be addressed to the requestor at DFAS thru the
DCMA FCG. Include on distribution the DCAA FLA at DFAS
Columbus, and all cognizant DCAA offices. Include a transmittal letter
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advising that the report contains sensitive information and should not be
released outside of DCAA.
8. Update permanent files (MAARs #1, #3, and #4 (if applicable)).
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